Modern economics is a mess. Time to clean up

De universiteit wordt nog altijd gezien als een vrijplaats voor kritische en onafhankelijke geesten. Maar als je economie gaat studeren kom je van een koude kermis thuis. Je moet eerst de ‘noodzakelijke basismodellen’ beheersen, dan pas zul je begrijpen hoe ‘sophisticated & advanced’ de economische wetenschap is geworden. Iedere keer weer werkt deze truc: economiestudenten houden zich gedeisd met hun kritiek, en doen braaf hun tentamens. In afwachting van betere tijden – en van uitstel komt afstel. Hoe lang nog?

by Dirk Damsma

Contrary to popular belief and university propaganda, academia do not always foster an independent mind. In their first course on microeconomics, every budding economist is confronted with the notion of rational economic man allocating his scarce resources to fulfill as many of his stable and given preferences as possible. If these budding economists are like me, they will find this very hard to stomach. I buy my groceries in the supermarket that is closest to my home. I buy a certain brand and type of computer if my tech-savvy friends recommend it and I find myself influenced by advertising on a daily basis. So, far from making rationally informed choices, I am a lazy uninformed creature of habit. My preferences are not stable and given, but depend on social ties and advertising. Moreover, behavioral economists have shown that such deviations from rationality are the norm rather than the exception (e.g. Thaler 2015). So, far from confirming the theoretical starting point, subsequent experiences and observations in behavioral economics have proven rational economic man to be an even more fictional entity than it already appeared at first sight.

Economic rationality as simulacrum – not an incentive to scientific scepticism

When voicing these misgivings in class, however, I was told that none of them matter in reality. Economic rationality was not to be taken as a simplified description of real behavior, but rather as a simulacrum. That is, people were not really assumed to behave this way, but the market as a whole could be modelled as if they did (see here for a very readable elaboration of this position – in Dutch). People could deviate from rationality for a while, but the market would discipline them in the end so the trend would be as our model predicted.

I couldn’t see how or why that would occur. If people buy their groceries dearer than necessary, this does not usually leave them so deprived and penniless that they are forced to rethink their shopping strategy. Thus, the irrational behavior of many people may well persist forever. But if this is so, the same product may be offered at many different prices at once and markets may never settle at a unique equilibrium in which a single price ensures a single sales volume. At this point, my microeconomics professor had had enough: ‘Mr. Damsma, if you want to be an economist it is crucial that you get a hold on this stuff. Insight will come, I promise.’

The moral of this story is that independent, critical thinking is often fine for card carrying members only. Undergraduates will have to learn the rules of the discipline first. So, far from fostering an independent mind, it can be said that academics often only accept criticism that follows disciplinary rules. Any attempt to debate the suitability of these rules themselves is likely to be met with skepticism: if someone does not accept a discipline’s starting point, s/he probably has not had proper training and is thus not worth talking to. Thus, having an independent mind hurts your academic career, while uncritical assimilation helps it forward.

Torturing the data, until they confess

And so, like many students before me (and undoubtedly many after me), I swallowed my criticism, silenced my intuition and set to work manipulating model after model. I could not believe this would ever help me understand reality and my professors hardly ever tried to demonstrate that it did either. Microeconomics 101 is not based on empirical data, nor is its truth demonstrated by them. As my studies continued, it became clear why my misgivings about rationality and equilibrium were silenced. It turned out that not only micro-economics, but modern macroeconomics too, was based on these counterintuitive and factually absurd representations of economic agency.

The models I was presented with became ever more mathematically intricate and complex, but insight never came. Sure, I learned to fit models to data, but the data hardly ever supported the model. It was rather the other way round: parameters in the model had to be adjusted until the model fitted the data. To paraphrase Coase: I learned to torture the data long enough to make them confess. But if every situation requires a new and unique model specification, it can hardly be said that the model helps us understand the data (Romer 2016). Unfortunately, economists are not rewarded for enhancing our understanding of empirical data. Instead, they are rewarded for showcasing their ability to force them into a framework in which rational agents interact to equilibrate demand and supply in markets. Thus, this ‘wholly counterintuitive doctrine (…) drives away all but a high-morale in-group that is enough to keep the sacred flame burning’ (Solow in Colander 2007).

The dark age of macroeconomics

After the financial crisis, more and more economists started to doubt whether this institutionalized silencing of critical thinkers was such a good idea. Krugman speaks of a ‘Dark Age of macroeconomics’ (2009) in which conformity with conventional wisdom (viz. rationality and equilibrium) trumps critical thinking and an honest pursuit of truth. Others explain ‘the systemic failure of academic economics’ with reference to ‘self-reinforcing feedback effects within the profession [which] led to the dominance of a paradigm that has no solid methodological basis and whose empirical performance is, to say the least, modest’ (Colander, Föllmer, Haas, Goldberg, Juselius, Kirman, Lux & Sloth 2009 in Kolb (ed.) 2010). Rodrik chimes in by saying ‘Macroeconomics may be the only applied field within economics in which more training puts greater distance between the specialist and the real world, owing to its reliance on highly unrealistic models that sacrifice relevance to technical rigor’ (2009). Levitt makes essentially the same point when he writes: ‘The single easiest way to make a mark in a modern macro paper is to solve a problem that is really, really hard mathematically. Even if it is not relevant to anything, it is seen as a sign that the author has “impressive skills”, which is enough to get a job – and even tenure sometimes – at top universities’ (2009).

The list of economists voicing such sentiments goes on and on and includes Nobel laureates like Stiglitz or former governor of the U.S. Federal Reserve System Meyer. This begs the question as to why students still need to learn this stuff. If so many prominent economists believe that modern macroeconomics is built on a foundation of quicksand and hardly relevant to anything, why do students still need to learn it? Are professors in modern macroeconomics unaware of all this criticism? Perhaps some are, but even those that have seen the writing on the wall, are frequently unable to break the mold. After all, they rose to prominence by being incapable of independent thoughts or willfully ignoring them (I, for one, do not see how else one could persist and flourish in a ’wholly counterintuitive doctrine’).

So, even if they know deep down that their profession is broken beyond repair, they have built their career on their extraordinary ability to ignore reality and manipulate absurd models rather than their skills in contemplating and assessing more realistic alternatives. So they continue to assess their students by the only yardstick they know: their ability to manipulate and build models in which rational representative agents optimize outcomes and equilibrate markets. Students that want to transform their discipline, thus have to navigate a minefield. They can only be taken seriously in the profession if they gain respect by getting excellent grades. To do so, they have to become very adept in manipulating the models they are taught. At the same time, they will have to make sure not to take them so seriously that they, too, feel obliged to perpetuate the very models that so many prominent economists now denounce. That is a difficult balancing act. Someone, however, needs to challenge the hegemony of the current high-priests of the profession and force them to reply.


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